Chapter 8, Problem 5CP

Part–A

(1)

To determine

Direct material variances:

The difference between the actual material cost per unit and the standard material cost per unit for the direct material purchased is known as direct material cost variance. The direct material variance can be classified as follows:

• Direct materials price variance.
• Direct materials quantity variance.

Direct labor variances:

The difference between the actual labor cost in the production and the standard labor cost for actual production is known as direct labor cost variance. The direct labor variance can be classified as follows:

• Labor rate variance.
• Labor time variance.

Variable factory overhead controllable variances:

The difference between the actual variable overhead costs and the standard overhead for actual production is known as the variable factory overhead controllable variances. The variable factory overhead controllable variance is computed as follows:

$\begin{array}{l}\text{Variable factory overhead}\\ \text{controllable variance}\end{array}\}\text{= }\left(\begin{array}{l}\text{Actual variable factory overhead}-\\ \text{Standard variable factory overhead }\end{array}\right)$

Fixed factory overhead volume variances:

Factory overhead volume variances refers to the difference between the budgeted fixed overheads at 100% of normal capacity, and the standard fixed overheads for the actual units produced. The factory overhead volume variances can be calculated as follows:

$\begin{array}{l}\text{Fixed factory overhead}\\ \text{volume variance}\end{array}\}\text{= }\left(\begin{array}{l}\text{Standard hours for 100\% of}\\ \text{normal capacity}-\text{Standard}\\ \text{hours for actual units produced}\end{array}\right)\times \left(\begin{array}{l}\text{Fixed factory }\\ \text{overhead rate}\end{array}\right)$

The fixed and variable portion of the utility cost using the high-low method.

Explanation of Solution

The fixed, and variable portion of the utility cost using the high-low method is $500,and $240 in the high cost method, and $500,and $100 in the low cost method respectively.

Working Notes:

Calculate the variable cost per unit.

$\begin{array}{c}\text{Variable cost per unit = }\frac{\text{Difference in total cost}}{\text{Difference in production}}\\ =\frac{\$740\left(\text{March}\right)-\$600\left(\text{January}\right)}{1,200\text{cases}\left(\text{March}\right)-500\text{cases}\left(\text{January}\right)}\\ \text{=}\frac{\$140}{700\text{cases}}\\ \text{=\$0}\text{.20}\text{per case}\end{array}$ (1)

Calculate the fixed and variable portion of the utility cost using high method:

$\begin{array}{c}\text{Total cost=}\left(\begin{array}{l}\text{Variable cost per unit}\\ \times \text{Units of production}\end{array}\right)+\text{Fixed cost}\\ \$740=\left(\$0.20(1)\times 1,200\text{units}\right)+\text{Fixed cost}\\ \text{Variable cost=\$240}\\ \end{array}$

$\begin{array}{c}\text{\$740 =\$240+Fixed cost}\\ \text{Fixed cost}\text{=\$740}-\text{\$240}\\ \text{Fixed cost =\$500}\end{array}$

Calculate the fixed and variable portion of the utility cost using low method:

$\begin{array}{c}\text{Total cost=}\left(\begin{array}{l}\text{Variable cost per unit}\\ \times \text{Units of production}\end{array}\right)+\text{Fixed cost}\\ \$600=\left(\$0.20(1)\times 500\text{units}\right)+\text{Fixed cost}\\ \text{Variable cost=\$100}\end{array}$

$\begin{array}{c}\text{\$600 =\$100+Fixed cost}\\ \text{Fixed cost}\text{=\$600}-\text{\$100}\\ \text{Fixed cost =\$500}\end{array}$

Conclusion

Hence, using the high method, the fixed and variable portion of the utility cost is $500, and $240. On the other hand, using the low method, the fixed and variable portion of the utility cost is $500, and $100 respectively.

Part–B

5.

To determine

To prepare: The August production budget.

Answer to Problem 5CP

Incorporation GS Budgeted Income Statement For the month ended August 31
Sales (9)			$ 150,000
Finished goods inventory, August 1		$ 12,000
Direct materials:
Direct materials inventory, August 1 (10)	$ 392
Direct materials purchases (Table 4)	23,231
Cost of direct materials available for use	$ 23,623
Less: Direct materials inventory, August 31 (11)	248
Cost of direct materials used in production	$ 23,375
Direct labor (Table 5)	9,900
Factory overhead (Table 6)	19,735
Cost of goods manufactured		53,010
Cost of finished goods available for sale		$ 65,010
Less: Finished goods inventory, August 31		7,000
Cost of goods sold			58,010
Gross profit			$ 91,990
Less: Selling expenses			30,000
Income from operations			$ 61,990

Table (7)

Explanation of Solution

Prepare the production budget for the month of August.

Incorporation GS
Production Budget
For the month ended August 31
Particulars	Cases
Expected cases to be sold	1,500
Plus desired ending inventory	175
Total units required	1,675
Less: Estimated beginning inventory	300
Total units to be produced	1,375

Table (3)

Part–C

10.

To determine

To determine and interpret: The direct materials price and quantity variances for the three materials.

Explanation of Solution

Determine the direct materials price variances for the three materials.

	Cream Base	Natural oils	Bottles
Actual price	$ 0.016	$0.32	$0.42
Less: Standard price	0.020	0.30	0.50
Difference	$(0.004)	0.02	$(0.08)
Multiply: Actual quantity	153,000 (13)	46,500 (14)	18,750 (15)
Direct materials price variance	$(612) Favorable	$930 (Unfavorable)	$(1,500) Favorable

Table (8)

Working Note:

$\begin{array}{c}\left(\begin{array}{l}\text{Actual quantity}\\ \text{for cream base}\end{array}\right)\text{=}\left(\begin{array}{l}\text{Number of cases expected}\times \text{Actual direct}\\ \text{materials quantity per case}\end{array}\right)\\ =1,500\text{cases}\times 102\text{oz}\text{.}\\ \text{=153,000 oz}\text{.}\end{array}$ (13)

$\begin{array}{c}\left(\begin{array}{l}\text{Actual quantity}\\ \text{for natural oils}\end{array}\right)\text{=}\left(\begin{array}{l}\text{Number of cases expected}\times \text{Actual direct}\\ \text{materials quantity per case}\end{array}\right)\\ =1,500\text{cases}\times 31\text{oz}\text{.}\\ \text{=46,500 oz}\text{.}\end{array}$ (14)

$\begin{array}{c}\left(\begin{array}{l}\text{Actual quantity}\\ \text{for bottles}\end{array}\right)\text{=}\left(\begin{array}{l}\text{Number of cases expected}\times \text{Actual direct}\\ \text{materials quantity per case}\end{array}\right)\\ =1,500\text{cases}\times 12.5\text{bottles}\\ \text{=18,750}\text{bottles}\end{array}$ (15)

Conclusion

Interpretation:

It can be understood from the above data that there is variances in the direct materials prices due to the fluctuations in the market prices. The actual price for natural oils got increased when compared to its standard price, whereas, the actual prices for the cream base, and bottles got decreased when compared to their respective standard prices.